Are you thinking of donating a lump sum to a charity of your choice at your decease?
The most efficient way to do that is through a life insurance policy, providing of course, that you are insurable. There are three methods by which a donor can gift life insurance to a charity. The policy proceeds can either be quested through a will, or a policy can be donated during lifetime, or lastly, the charity can be made the beneficiary. Let’s examine each method, and the various tax treatments of each method.
1. Bequest of the Policy Proceeds
The individual owns the policy during lifetime and the estate is named as the beneficiary. The donation is then made through his or her will. The will would indicate that an amount equal to the insurance proceeds would be given to the named charity.
TAX TREATMENT: The donor would not receive any tax credits for premiums paid during lifetime, but would receive a tax credit in the year of death. The donation limit in the year of death (and the prior year) is 100% of net income.
CONSIDERATIONS: The individual maintains control of the policy during lifetime, but the proceeds are subject to probate as they pass through the estate. The charity is at risk because the will can be changed to eliminate the charity as the beneficiary.
2. Policy donated during Lifetime: Owned by the Charity
In this case, the policy is owned by the charity. The donor is the insured and payor, and the charity is the beneficiary. The charity must obtain the donor’s consent when applying for the policy. An existing policy can also have an ownership transfer to the charity. The donor is still paying the premiums, however.
TAX TREATMENT: In this case, the premiums, being paid by the donor, will be considered a charitable donation eligible for a charitable tax credit. Thus each year there would be tax credits for the premiums paid, but upon death no further tax credits accrue to the donor or the estate.
CONSIDERATIONS: If the donor ceases to pay the premiums, the policy may lapse or the charity may continue to pay premiums or surrender the policy. The policy is not subject to probate as it does not pass through the donor’s estate.
3. Policy donated during Lifetime: Owned by the Donor
In this case the donor owns the policy and pays the premium but names the charity as the beneficiary.
TAX TREATMENT: No tax credits are applied to the premiums paid, but the individual may claim a charitable tax credit on the terminal return for the death benefit paid to the charity. The donation limit for gifts in the year of death is 100% of income. The policy is not subject to probate as it does not pass through the donor’s estate.
CONSIDERATIONS: This method allows flexibility for the donor to change his/her mind as to the charity who will benefit. However, from the charity’s viewpoint, since the donor can change the beneficiary, the charity risks not ultimately receiving the gift.
A life insurance policy is an excellent vehicle for leaving a legacy to a charity. Our recommendation is usually to avoid probate – scenarios 2 or 3. Some discussion with your financial advisor would help to determine whether it is best to claim the tax credit on the annual premiums or on the proceeds at death.